Manulife US REIT - Maybank Kim Eng 2019-04-26: A Strong Start


Manulife US REIT - A Strong Start

In line, maintaining forecasts

  • MANULIFE US REIT (SGX:BTOU)’s 1Q19 DPU of USD1.51cts rose 0.7% y-o-y (on an adjusted basis), and was in line with our estimates at 26% of our full-year. We have kept DPU forecasts and DDM-based USD1.00 Target Price (COE: 7.7%, LTG: 2.0%) unchanged.
  • We continue to favour Manulife US REIT for its DPU visibility supported by stable income growth and low leasing risks, with:
    1. 94% of its leases embedded with either annual rental escalations averaging 2.5% or mid-term, periodic rental increases;
    2. a long 6.0-year WALE with 56.0% of gross rental income expiring after 2023; and
    3. a diversified 116-strong tenant base.
  • Valuations are compelling at 6.8-7.1% FY19-20E DPU yields vs 4.6- 6.5% offered by its office S-REIT peers. BUY.

Occupancy improved, WALE pushed out

  • Manulife US REIT's 1Q19 revenue and NPI jumped 28.5% y-o-y and 27.7% y-o-y respectively on the back of the Penn and Phipps deal completed in Jun 2018. Portfolio occupancy rose q-o-q from 96.7% to 97.4%, mainly due to Peachtree in Atlanta, with a backdrop of firm employment growth.
  • Manulife US REIT has achieved strong leasing momentum – leases for 6.1% of its AUM (including Hyundai at Michelson) were signed. This has pushed 56.0% of its lease expiries to 2024 and beyond, and WALE up from 5.8 to 6.0 years.

Steady yield growth

  • We see steady yield growth with 94% of leases backed by rent escalations - 55% embedded with fixed increases averaging 2.5% pa; and 39% under mid-term or periodic rental increases. These are supported by a 5-14% gap between existing and market rents. Net absorption has been strong against rising new supply, and backed by macro-economic fundamentals.
  • AEI works at Figueroa and Exchange are on track to complete in 4Q19/1Q20, and we continue to see its assets as well-placed and for rents to rise by up to 5-10% in 2019-20E on tight supply.

Sound balance sheet, strong sponsor pipeline

  • Gearing has risen steadily to fund four acquisitions since its May 2016 IPO but remains at a comfortable 37.6%, or USD260m in debt headroom.
  • We expect acquisitions to provide upside to DPUs, supported by its sponsor’s strong deal pipeline of real-estate assets concentrated in the US.

Chua Su Tye Maybank Kim Eng Research | 2019-04-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.000 SAME 1.000